MANHATTAN (CN) – KeySpan electric company will pay $12 million to settle an antitrust complaint, federal prosecutors said. KeySpan’s scheme to avoid losing profits as more competitors entered the market led to higher electricity prices in the New York City area, according to the settled federal complaint.
KeySpan used a financial services company to secretly take a financial interest in its largest competitor, Astoria, in 2006, according to the complaint.
Prosecutors say KeySpan feared the tight market in which it thrived was about to change because two new large generation plants were slated to open in 2006.
At the time, KeySpan was the largest seller of electricity generating capacity in the New York City market.
The Justice Department says the new companies should have broken the capacity shortage that had kept prices at capped levels, but KeySpan’s maneuvering with Astoria kept the added capacity from making prices competitive.
KeySpan paid Astoria’s owner a fixed revenue stream in exchange for the revenue generated from Astoria’s capacity sales in the auctions, according to the complaint.
“[The] swap effectively eliminated KeySpan’s incentive to compete for sales in the same way a purchase of Astoria or a direct agreement between KeySpan and Astoria would have done,” according to the complaint. “By providing KeySpan revenues from Astoria’s capacity, in addition to KeySpan’s own revenues, the swap made bidding the cap KeySpan’s most profitable strategy regardless of its rivals’ bids.”
In the tight market, KeySpan used a “bid cap” to set high prices and profit by sacrificing sales on only a small fraction of its 2,400 megawatts of generating capacity, according to the complaint.
Retail electricity sellers must buy “installed capacity” from generators such as KeySpan, which owns the Ravenswood electrical generation facility in New York City. Since buyers needed most of KeySpan’s output to meet expected demand, only the bid cap limited KeySpan’s ability to set price levels.
If KeySpan continued its “bid the cap” strategy, it would have to withhold a substantial amount of its own capacity from the market, according to the complaint. Prosecutors said prices high would have stayed high, but KeySpan was not prepared to lose $90 million a year sacrificing sales and risk that competitors would undercut its price altogether.
By taking a financial interest in Astoria, KeySpan earned revenue on a larger base of sales.
“With KeySpan deriving revenues from both its own and Astoria’s capacity, the KeySpan Swap removed any incentive for KeySpan to bid competitively, locking it into bidding its cap,” according to the complaint. “Capacity prices remained high as if no entry had occurred.”
The Justice Department says KeySpan, which National Grid acquired in 2007, must disgorge any profits made through March 2008 for antitrust law violations, and pay $12 million to the United States.